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Shaking Up Japanese Telecom -- Again

November 27, 2005

Sachio Semmoto likes nothing more than seizing an opportunity when he spots it. Six years ago, the former electrical engineer thought he could crack open Japan's fossilized telecom sector by connecting businesses to unused lines owned by Nippon Telegraph & Telephone Corp. Although few believed a startup with just $250,000 in capital could take on a giant like NTT, Semmoto milked contacts built up over two decades in the industry and finally got what he wanted. Within 11 months, his eAccess Ltd. had sealed a deal letting him resell service over NTT's lines. Today, eAccess has 1.8 million subscribers and expects profits of $23 million on sales of $500 million this year. "There's nothing better than going full-throttle in pursuit of a business opportunity once you've assessed the risks," says Semmoto.

Now, Semmoto is smelling opportunity again. On Nov. 10, Japan's communications ministry granted eAccess one of three new cellular licenses, opening the market to the country's first new entrants in a dozen years. The other licenses went to data transmission operator IPMobile and Softbank, which owns Japan's biggest portal, Yahoo Japan. "We intend to revolutionize the mobile phone industry," says Semmoto, chairman of eAccess.

The industry could use a shakeup. The current players -- NTT DoCoMo (), KDDI, and Britain's Vodafone Group () -- have been less aggressive than operators in many other countries, so Japan's 90 million cell-phone users pay rates that are among the world's highest. And because of the carriers' cozy relationships with Japan's equipment makers, foreign powerhouses such as Samsung Group, LG, Motorola (), and Nokia () have been virtually shut out of the market. The three carriers buy less than 1% of their handsets from foreigners, JPMorgan Chase & Co. () estimates.

Semmoto thinks he can change all that. For starters, he says eAccess is willing to consider bids from any equipment manufacturer in the industry, Japanese or not. Beginning in 2007, the company will offer service in Tokyo, Osaka, and Nagoya at rates that he says will undercut today's carriers substantially, but he declines to give details. Semmoto expects as many as 10 million subscribers to quickly sign up as he expands the network nationwide. Although he won't give a precise timetable, he feels confident of winning over far more than the 2 million users the newcomers are required to have by March, 2011, under the terms of their licenses. Once eAccess and the others have 2.5 million subscribers, they can apply for more spectrum, which telecom execs say the companies will need to keep calls flowing smoothly.

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Trouble is, Semmoto faces some pretty tough competition. While Vodafone is having trouble finding new subscribers, as many as 2 million new users a year are signing up for the 3G services offered by DoCoMo and KDDI. IPMobile expects to have nearly 12 million subscribers within five years by focusing on wireless broadband data services for PCs and other devices.

And Softbank has already proven to be a formidable rival. Although it started offering broadband two years after eAccess, Softbank's Yahoo!BB service now has nearly three times as many subscribers as Semmoto's company. More important, Softbank has $5 billion in cash it can invest in its network. "Softbank has a shot at surviving because of its size," says JPMorgan analyst Kazuyo Katsuma. "For eAccess, survival will depend on whom it partners with."

Lucky for eAccess, Semmoto is no stranger to the industry. After earning a PhD from the University of Florida as a Fulbright scholar, Semmoto joined NTT in the mid-1970s. He left in the early 1980s to start what would become KDDI with seed money from Kyocera Corp. (). In 1999, he and Eric Gan, an analyst from U.S. investment bank Goldman Sachs & Co. (), launched eAccess with their own money. They quickly found Internet service providers and other e-commerce sites willing to pay for space on NTT's unused broadband lines, and sales surged. In October, 2003, the company raised $70 million in an IPO; a secondary offering brought in another $140 million. By 2004, eAccess was turning a profit and had bought out America Online's Net portal business in Japan, which created a new source of advertising revenues and gave eAccess a direct marketing channel to sell digital music and TV clips to consumers.

Semmoto's contacts are starting to pay off. So far, his team has amassed $450 million for the cellular business from a consortium of investors, including TV network Tokyo Broadcasting System and talent agency Yoshimoto Kogyo Ltd. Now they're negotiating with Goldman and other creditors for up to $400 million more. No small sum, but probably only enough to cover the first year or so of building and operating the network. Still, industry insiders say that if Semmoto can get the service off the ground, he'll have a good shot at raising the rest of the $5 billion to $6 billion that it will likely cost to complete his network. "Semmoto-san is the closest thing you can get to a serial entrepreneur in Japan," says Frank Seiji Sanda, founder and CEO of Japan Communications Inc., a Tokyo-based provider of wireless data service. "He's got the energy. He's got the contacts. He's got the chutzpah."